By MICHELLE SINGLETARY
Gannett News Service
In what will undoubtedly be the first of many "I told you so" reports,
the National Association of Consumer Bankruptcy Attorneys has found
that, overwhelmingly, people who file for bankruptcy protection aren't
deadbeats who went on shopping sprees with the intention of shirking
their debts.
That's quite contrary to what was being claimed by supporters of the new
federal bankruptcy law that went into effect last October.
For years, those proponents argued that billions of dollars were being
lost because people were simply being allowed to walk away from their
debts.
"As retailers, we have seen firsthand the dramatic effect bankruptcy has
had on both consumers' finances and on our ability to serve the public,"
wrote Steve Pfister, senior vice president for government relations at
the National Retail Federation, in a letter to House members as the
bankruptcy bill was being debated. "These filings ultimately cost the
tens of millions of households we serve hundreds of dollars each in
unseen costs every year. Unfortunately, many of those losses are the
result of misuse of the law by irresponsible, higher-income filers."
On the day President Bush signed the bankruptcy bill, he said: "In
recent years, too many people have abused the bankruptcy laws. They've
walked away from debts even when they had the ability to repay them."
The new law requires people to get credit counseling before they can
file for bankruptcy protection. The premise behind this provision is
that by forcing people to get counseling, it will show that many
bankruptcy filers in fact have enough money left over after taking care
of their essential expenses to repay creditors.
I spent several years reporting on bankruptcy, and I saw no evidence
(academic or anecdotal) to support claims that many people were gaming
the system.
Now, in the first analysis of the tens of thousands of people who have
undergone credit counseling since the law passed, the bankruptcy
attorneys association found that nearly all (97 percent) of the debtors
truly couldn't pay their debts.
The association examined data provided by six large and small
credit-counseling firms from a cross-section of the country. All of the
firms have been authorized by the Justice Department's Executive Office
for U.S. Trustees to provide the required pre-bankruptcy counseling. In
total, the firms that were surveyed counseled 61,355 consumers.
Four out of five filers felt forced to seek bankruptcy protection
because of a job loss, catastrophic medical expenses or the death of a
spouse, according to the report, "Bankruptcy Reform's Impact: Where Are
All the Deadbeats?"
One in 30 consumers (3.3 percent) was a candidate for paying off what he
or she owed under a debt management plan (DMP), the report indicated.
With a DMP, a debtor makes one monthly payment to a credit-counseling
agency. The agency then distributes the funds according to a payment
schedule it has worked out with the person's creditors.
Creditors may agree to lower interest rates or waive certain fees if
they are being repaid through a DMP, although this is happening less and
less as more people sign up for such plans. Typically it can take 36 to
60 months to repay debts through a DMP.
The highest estimate of consumers being able to make repayments under a
credit-counseling DMP was 5 percent, with the low being in the 1 to 2
percent range, according to the report.
"The masses of expected deadbeats who were supposed to be identified
under the new law and forced into debt management plans have not
materialized," the association's report concludes.
Only about one in five (21 percent) of those seen by a credit-counseling
firm was identified as racking up debt due to "circumstances within
their control." In many of those cases, people said they didn't fully
appreciate how credit card fees and finance charges could put them
deeper and deeper into debt.
OK, if you must, call the latter folks deadbeats. It's hardly a
revelation that if you buy something on credit and you don't pay the
bill off the next month, you're going to be charged interest. With the
low minimum payments required, it's easy to amass a lot of debt over
time. We all know this.
But I do sympathize with people who experience a major disruption to
their income or become financially ruined by uncovered health care costs
(a growing and disturbing trend in America). It is for these people we
have bankruptcy protection.
There is at least something good to come out of the new law. If you're
looking for a reputable credit-counseling agency -- even if you aren't
filing for bankruptcy -- I'd suggest you choose one now certified by the
Trustee program. At least then you'll have less chance of dealing with a
deadbeat agency.
To find an agency on the list, go to http://www.usdoj.gov/. In the
search field, type "approved credit counseling agencies."
Michelle Singletary writes Thursdays about personal finance. Readers can
write to her at The Washington Post, 1150 15th St. NW, Washington, D.C.
20071. E-mail: singletarym@washpost.com
Gannett News Service
In what will undoubtedly be the first of many "I told you so" reports,
the National Association of Consumer Bankruptcy Attorneys has found
that, overwhelmingly, people who file for bankruptcy protection aren't
deadbeats who went on shopping sprees with the intention of shirking
their debts.
That's quite contrary to what was being claimed by supporters of the new
federal bankruptcy law that went into effect last October.
For years, those proponents argued that billions of dollars were being
lost because people were simply being allowed to walk away from their
debts.
"As retailers, we have seen firsthand the dramatic effect bankruptcy has
had on both consumers' finances and on our ability to serve the public,"
wrote Steve Pfister, senior vice president for government relations at
the National Retail Federation, in a letter to House members as the
bankruptcy bill was being debated. "These filings ultimately cost the
tens of millions of households we serve hundreds of dollars each in
unseen costs every year. Unfortunately, many of those losses are the
result of misuse of the law by irresponsible, higher-income filers."
On the day President Bush signed the bankruptcy bill, he said: "In
recent years, too many people have abused the bankruptcy laws. They've
walked away from debts even when they had the ability to repay them."
The new law requires people to get credit counseling before they can
file for bankruptcy protection. The premise behind this provision is
that by forcing people to get counseling, it will show that many
bankruptcy filers in fact have enough money left over after taking care
of their essential expenses to repay creditors.
I spent several years reporting on bankruptcy, and I saw no evidence
(academic or anecdotal) to support claims that many people were gaming
the system.
Now, in the first analysis of the tens of thousands of people who have
undergone credit counseling since the law passed, the bankruptcy
attorneys association found that nearly all (97 percent) of the debtors
truly couldn't pay their debts.
The association examined data provided by six large and small
credit-counseling firms from a cross-section of the country. All of the
firms have been authorized by the Justice Department's Executive Office
for U.S. Trustees to provide the required pre-bankruptcy counseling. In
total, the firms that were surveyed counseled 61,355 consumers.
Four out of five filers felt forced to seek bankruptcy protection
because of a job loss, catastrophic medical expenses or the death of a
spouse, according to the report, "Bankruptcy Reform's Impact: Where Are
All the Deadbeats?"
One in 30 consumers (3.3 percent) was a candidate for paying off what he
or she owed under a debt management plan (DMP), the report indicated.
With a DMP, a debtor makes one monthly payment to a credit-counseling
agency. The agency then distributes the funds according to a payment
schedule it has worked out with the person's creditors.
Creditors may agree to lower interest rates or waive certain fees if
they are being repaid through a DMP, although this is happening less and
less as more people sign up for such plans. Typically it can take 36 to
60 months to repay debts through a DMP.
The highest estimate of consumers being able to make repayments under a
credit-counseling DMP was 5 percent, with the low being in the 1 to 2
percent range, according to the report.
"The masses of expected deadbeats who were supposed to be identified
under the new law and forced into debt management plans have not
materialized," the association's report concludes.
Only about one in five (21 percent) of those seen by a credit-counseling
firm was identified as racking up debt due to "circumstances within
their control." In many of those cases, people said they didn't fully
appreciate how credit card fees and finance charges could put them
deeper and deeper into debt.
OK, if you must, call the latter folks deadbeats. It's hardly a
revelation that if you buy something on credit and you don't pay the
bill off the next month, you're going to be charged interest. With the
low minimum payments required, it's easy to amass a lot of debt over
time. We all know this.
But I do sympathize with people who experience a major disruption to
their income or become financially ruined by uncovered health care costs
(a growing and disturbing trend in America). It is for these people we
have bankruptcy protection.
There is at least something good to come out of the new law. If you're
looking for a reputable credit-counseling agency -- even if you aren't
filing for bankruptcy -- I'd suggest you choose one now certified by the
Trustee program. At least then you'll have less chance of dealing with a
deadbeat agency.
To find an agency on the list, go to http://www.usdoj.gov/. In the
search field, type "approved credit counseling agencies."
Michelle Singletary writes Thursdays about personal finance. Readers can
write to her at The Washington Post, 1150 15th St. NW, Washington, D.C.
20071. E-mail: singletarym@washpost.com